A recent report by the Press Trust of India carried in the media revealed that the regulator has become increasingly concerned over the spill-over impact of recent drastic downgrades by rating agencies. With that in mind, the Securities and Exchange Board of India, or SEBI, plans to strengthen its disclosure guidelines for issuance and review of the ratings by such entities.
Most recently, ICICI Bank and Bank of Baroda were in the news due to downgrades by Morgan Stanley. This follows CRISIL’s downgrade of eight public sector banks. ICRA downgraded Renuka Sugars. CARE downgraded SAIL and ABAN Offshore. Fitch Ratings downgraded JSW Steel. Standard & Poor’s downgraded its long-term credit rating of metals and mining company Vedanta Resources. Moody’s downgraded Tata Steel. And the list goes on….
According to report by rating agency CRISIL, debt of downgraded firms stood at Rs 3.8 trillion for FY16 – the highest in CRISIL’s history. The report also noted that credit quality metrics deteriorated in H2 2015-16. Credit ratio (upgrades to downgrades) dropped to 0.76 (2.13 in H1) and debt weighted credit ratio (quantum of debt of upgraded firms to those downgraded) stood at 0.2, the lowest in 3 years.
The PTI news report also noted that SEBI is mulling over whether or not to ask the credit rating agencies to hive off their activities involving rating of instruments other than securities, as they do not fall under SEBI’s jurisdiction. Moreover, the agencies would also need to publicly disclose various criteria used for rating and the same would need to be referenced in their press releases. The internal document governing rating process would need to be made available on the website of the rating agency concerned.
Mutual funds too on the regulator's radar...
The regular is concerned about mutual funds specially in the light of the JP Morgan AMC episode last year, where the latter was forced to restrict redemptions in two of its debt schemes due to a downgrade of bonds issued by Amtek Auto Ltd.
In February, the Economic Times reported a SEBI official stating that the regulator has been seeking details from fund houses about their exposure to downgraded paper.
In January, SEBI came out with guidelines for debt mutual funds to mitigate risks arising on account of high levels of exposure in the wake of events pertaining to credit downgrades. And, to put funds in a better position to handle adverse credit events.
Exposure limits of debt-oriented mutual funds were revised at three levels: issuer, group and sector.
1) The single issuer limit is now restricted to 10% of the net asset value, or NAV, of the scheme. What this means is that not more than 10% of a scheme's corpus can be invested in debt securities of a single company. It can be extended to 12% if the approval of the trustees has been attained. Earlier the cap was 15% extendable up to 20% on trustee approval.
2) Group level limits regarding the issuer companies would be capped at 20%, extendable to 25% of NAV on obtaining the approval of the trustees. Group meaning an entity, its subsidiaries and fellow subsidiaries, its holding company and its associates.
3) Exposure to a single sector would be restricted to 25% of the scheme’s NAV, down from 30%.
